Altman Z-Score
Z-score is a statistical tool for foreseeing the chances of a company about to get bankrupt. It represents the creditworthiness of a company from publicly available data. Altman Z-Score Calculator is an online aid to such statistical calculations.
This concept of Altman Z-Score was developed by Edward I Altman in the 1960s with the aim to evaluate the default rate of listed manufacturing companies. Later on, it was revised for private and non-manufacturing concerns as well.
Formula
For Calculating Z-Score, consider the following formula:
For Public Company:
Z-Score = x1*1.2 + x2*1.4 + x3*3.3 + x4*0.6 + x5*0.999
For Private Company:
Z-Score = x1*0.717 + x2*0.847 + x3*3.107 + x4*0.420 + x5*0.998
For Non-Manufacturing Company:
Z-Score = x1*6.56 + x2*3.26 + x3*6.72 + x4*1.05
Where,
- x1 = Liquidity Factor = Working Capital / Total Assets
- x2 = Leverage Factor = Retained Earnings / Total Assets
- x3 = Profitability Factor = EBIT / Total Assets
- x4 = Solvency Factor = MV or BV of Equity / Total Liabilities
- x5 = Activity Factor = Net Sales / Total Assets
About the Calculator / Features
The Altman Z-Score Calculator calculates the Z-score of different types of companies, that is, public, private or non-manufacturing concerns. To calculate Z-score using Altman Z-Score Calculator, the user has to input the accurate figure of the following data:
- Working capital
- Retained earnings
- EBIT (Earnings before Interest & Tax)
- MV or BV of equity
- Total liabilities
- Net sales
- Total assets
Calculator
How to Calculate using Calculator
The user has to input the following figure for obtaining a Z-score of the different types of companies in seconds. He is simply required to put the following details into the calculator.
Working Capital
Working capital is an important indicator of short-term liquidity. It can be obtained by subtracting current liabilities from current assets.
Retained Earnings
It is that portion of the profit which is retained by the company after distributing dividends to equity shareholders. It is the surplus profit left with the company which it uses for future investments and growth of the company.
EBIT
EBIT or Earnings Before Interest and Tax determines the operating income generated by the company. It does not consider the interest and tax amount for the purpose of calculation.
MV / BV of Equity
For calculation of the Z-score of a public company, the user has to insert the market value (MV) of the share of the company. And, since, the shares of a private company are not publicly traded, it cannot have market value and therefore, the user is required to provide book value (BV) of the shares.
Total Liabilities
Total liabilities is the sum total of all short-term as well as long-term liabilities of a company.
Net Sales
Net sales is a result of total sales less sales returns.
Total Assets
Total assets of company include all current and non-current assets of the company.
All the above figure can easily be obtained from the company’s financial statements.
Example of Altman Z-Score
Suppose Mr. X, an investor, is willing to invest in a company. He has two options, that is, to invest in A Ltd. or B Ltd. The details of the two companies are as below:
| Particulars | A Ltd. ($) | B Ltd. ($) |
| Working Capital | 250,000 | 440,000 |
| Retained Earnings | 500,000 | (100,000) |
| EBIT | 250,000 | (60,000) |
| MV / BV of Equity | 1,500,000 | 1,170,000 |
| Total Liability | 500,000 | 1,500,000 |
| Net Sales | 500,000 | 1,800,000 |
| Total Assets | 1,000,000 | 2,000,000 |
Z-Score of A Ltd.:
(0.25*1.2) + (0.5*1.4) + (0.25*3.3) + (3*0.6) + (0.5*0.999) = 4.1245
Z-Score of B Ltd.:
(0.22*1.2) + (-0.05*1.4) + (-0.03*3.3) + (0.78*0.6) + (0.9*0.999) = 1.4621
Interpretation
For a public company, a score less than 1.81 means the company has high chances of getting bankrupt. A score between 1.81 and 2.99 defines the medium chances of bankruptcy while a score more than 2.99 is treated as good. It means a company is far away from the possibility of getting bankrupt.
In the example above, Company A has a very good score of 4.125 which simply means that company A is not at the risk of bankruptcy. While Company B even after having more assets than company A is at the risk of bankruptcy.
For a private company, a score less than 1.23 defines the high chances of bankruptcy. A score between 1.23 and 2.9 defines the mild chances of bankruptcy while a score more than 2.99 is treated as good.
In case of non-manufacturing company, a score less than 1.1 is treated as very bad while more than 2.6 is a good indicator of solvency.
